Streetwise Professor

December 26, 2017

Agency Costs: Washington’s Augean Stables

Filed under: Economics,Politics,Regulation — The Professor @ 6:09 pm

In news that definitely added to my holiday cheer, a gloomy New York Times moaned that “[m]ore than 700 people have left the Environmental Protection Agency since President Trump took office, a wave of departures that puts the administration nearly a quarter of the way toward its goal of shrinking the agency to levels last seen during the Reagan administration.”

Given that the EPA is one of the most malign agencies in DC, every subtraction is an addition to America’s wealth–and no, this will not detract markedly, if at all from environmental quality. Or at least, any loss in environmental quality would not have been worth the cost necessary to achieve it.

The most signal achievement of Trump’s first almost year has been on the regulatory front. (The recent tax law arguably pips that.) The metastasizing regulatory/administrative state under both the Bush and Obama administrations is a detriment to prosperity, and in particular to the dynamism of the American economy. It is the engine of European-like sclerosis, and it badly needs to be brought under control.

Trump has begun–and only that–the task of cleaning this Augean Stables on the Potomac. The bureaucrats are none to happy, and are fighting back, mainly through classic bureaucratic guerrilla warfare. Unfortunately, they have advantages in this form of combat, and any progress will be achieved slowly, and only through unceasing effort. Those appointed to lead the agencies are often at a disadvantage in taming those who work for them even when they have a will to do so, and what’s more, all of the mechanisms of capture are at work here, meaning that agency political appointees are constantly at risk of going native.

The administrative state is a threat to prosperity and liberty, and a Constitutional anomaly, not to say monstrosity. Administrative agencies combine executive, legislative, and judicial functions, thereby threatening the separation of powers and associated checks and balances which are intended to prevent any single branch of government overawing the others. Indeed, in many respects the administrative state has become an independent branch of government, though not one formally established by the Constitution.

Moreover, it is not subject to the normal mechanisms of accountability. Yes, it is formally subject to Congressional oversight and some presidential control, and hence indirectly subject to the electorate, but due in large part to the scope and intricacy of the regulators’ responsibilities, there is a huge principal-agent problem: agency costs (as economists use the term) are a major issue with federal agencies. It is very difficult for Congress or the White House to control regulators. Further, information asymmetries make it inefficient to utilize high-powered incentives to get regulators to implement the wishes of those who formally control them. Civil service protections insulate bureaucrats from personal accountability for all but the most egregious misconduct (and sometimes not even then).

There is also a strong bias towards expanding agencies’ power. Several factors work in this direction, and few in the opposite way. Empire building is one such factor–regulators have a strong preference to expand their power. Congressional committees that oversee agencies also gain political power when the influence of their charges expand. (This shares some similarities with a mafia protection racket.) Government agencies attract people who are ideologically predisposed to expansive exercise of government power.

These asymmetries lead to a ratchet effect. Statist administrations–notably Obama’s, but to a considerable degree Bush’s as well–find allies in the administrative state who eagerly push their agenda. (Look at the CFTC in the Gensler years.) Less statist ones–like Trump’s–face a wearying battle of attrition to undo what had been put in place by previous administrations (and Congresses).

Legal precedents only make things more difficult. The Chevron doctrine (derived from a 33 year old Supreme Court decision) requires federal courts to defer to the judgments (I would not say expertise) of regulatory agencies in matters of statutory ambiguity and interpretation. This exacerbates greatly the agency problems, because since Congressional “contracts” (i.e., laws) are inherently incomplete (they do not specify regulatory actions in every state of the world), such ambiguities and necessities of interpretation are inevitably legion. And under Chevron, the federal courts can do little to rein in an agency. (Justice Gorsuch has criticized Chevron, and hopefully soon there will be an opportunity to reverse it or narrow it substantially.)

The administrative state is a progressive–and Progressive–creation. It reflects deep suspicion and skepticism about private ordering, and a belief in the superior knowledge and moral superiority of an expert class who should be protected from popular whims and passions, as expressed through election results, because those whims and passions are not the reflection of wisdom, knowledge, or dispassionate analysis. (If you want a sick laugh, look at Tom Nichols’ bleatings about expertise at @radiofreetom on Twitter.)  In the progressive worldview, the lack of democratic accountability is a feature, not a bug. Leave these people alone. They know better–and are better–that you!

The strongest case for some insulation of administrative agencies from more intrusive control by the Constitutionally-recognized branches of government is that this facilitates credible commitments: market participants, and citizens generally, know there will be some stability in rules and regulations, and can plan accordingly. But given the tendency to expand the scope of regulations, this translates into stability of overregulation.

There’s also something, well, Russian about a highly bureaucratic state, largely run by an unelected nomenklatura. Read Tocqueville’s descriptions of 19th century Russia and the 19th century US, and you’ll see that the administrative state leans far more towards the former than the latter.  I would also note that the bureaucracy is one of Putin’s strongest political pillars.

So the news that a few bureaucrats at the EPA are so disenchanted by Trump that they’ve up and quit is encouraging, but it’s at most a small victory in a big war. I have been encouraged by few other wins (e.g., on net neutrality), but the most I hope for is an elimination of some of the most egregious excesses of the Obama (and to a lesser degree Bush) years. The overall trend is towards a more powerful, insular, and unaccountable administrative state, much to the detriment of America’s freedom, dynamism, and prosperity.


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  1. I prefer maintaining the tug of war between regulators and the businesses regulated – Take apart the EPA and the business’s they regulate – which also have ’empire creating’ tendencies – will be at times destructive – as well as creative: rivers and air at the source of business activity such as coal, and chemical industrial – also travel far past from their local point of origin – past their source of profit and job creation – and pose risks …and it’s not as if such business does not have some heavy hitting lobbyists on their side to go toe to toe with regulators.

    Comment by Howard Seth Miller — December 27, 2017 @ 1:08 am

  2. Just let the states lead the charge. California seems to have no problem passing draconian environmental laws that suit its progressive ideologues. I agree that some minimum national standards are a positive (I don’t want to live in China), but this seems to be an issue where states should decide what the appropriate balance is.

    In any case, US environmental policy is a joke when we can just offshore the pollution to low-enforcement jurisdictions. The more we tighten the rules, the more production moves to countries that have utterly abysmal standards. Low value-add Chinese growth has done more environmental damage than decades of first world industrial growth.

    Comment by Blaise Bardamu — December 27, 2017 @ 9:07 am

  3. “The more we tighten the rules, the more production moves to countries ….”: my dear sir, you are guilty of consequentialism. Goodthink People consider the symbolic value of political actions, not their consequences.

    Comment by dearieme — December 27, 2017 @ 5:49 pm

  4. SWP:


    ‘Symbolic … political actions?’ Posing? Posturing? Value signaling?

    Vlad is SO sorry to have missed you on his last secretive jaunt to Houston.

    VP VVP

    Comment by Vlad — December 28, 2017 @ 5:48 pm

  5. On the wisdom vel non of the Chevron doctrine, its a question of whose ox is getting gored. One of the first to criticize it was Patricia Wald, a liberal DC Circuit judge who made the point that it favored the politics of the administration appointing the agency members. Well, yeah. Gorsuch’s ardor for change in the doctrine for deference to administrative expertise may diminish as Republicans take over the nomenklatura.

    Comment by Timm Abendroth — December 29, 2017 @ 5:44 pm

  6. “You have sat too long for any good you have been doing lately… Depart, I say; and let us have done with you. In the name of God, go!” – Oliver Cromwell

    Comment by Thomas Jefferson — January 2, 2018 @ 11:30 am

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